Building A Realistic Budget

 The Map To Repairing Your Credit

For most families, the family budget is pretty simple. Money comes in and money gets spent.  

Income generally is fixed, and the outflow only seems to increase. If too much money gets spent, the shortfall gets added to the family debt load.  

As the debt load increases, more of the money coming in goes to paying the debt, which leaves less for spending, which means you charge more, which increases the debt. Sound like a vicious endless cycle? It is. Oddly enough, most people understand car loans and mortgages.  They take the time to ensure that those debt loads can be handled by the family income before making a purchase.  But that piece of plastic is another matter. 

When asked "where does the money go?" most people will  respond "for necessities--food, clothes, things for the kids. Nothing is wasted." It's a lie and in their heart they know it.

America is a consumer economy and our idea of what a necessity is often confused with what a convenience is.

In reality, most families have no clue where their money goes.  There is no written document or record that shows how the money is spent.  You take the time to make a list before shopping for groceries, isn’t it just as important to make a list before shopping for clothes, utilities, entertainment etc? 

The first step in getting your family cash flow working efficiently is knowing where you are today in your income, debt load and spending habits.  You don’t have to be a CPA to determine this.  You do however, have to use real numbers and not guesstimate.   

So where do you start?  First you need a place to put this information.  If you don’t want to spend $50 on Quicken, or you don’t feel comfortable with your Excel skills, go to an office supply store and get a ledger book. 

Better yet, Google has a free budget spread sheet that is easy to use and free online. We'll give you the link to that resource at the end of this article.  If you use a software program, it will suggest income and expense categories.  It suggests the categories but YOU have to fill in the numbers! This can be a tedious task but don't be discouraged. This is an important part in building a map to repair or improve your credit. Knowing where you are is the road map to getting where you want to go. 

So here's what you need as a minimum.  If you followed "What Do I Owe" you already have your credit card info available.  That's great.  If not, take a look at the article and prepare the spreadsheet that it talks about.

With that done you are going to need:

• Car Payment
• Mortgage or Rent Payment
• Auto, home, health and life insurance premium
• Utilities bill (electric, gas, water, trash removal) preferably a 3 month average.
• Telephone (land line)
• Cell phone
• Internet Connection
• Cable TV
• Unsecured Loans (student loan, personal loan)
• Medication (if on an ongoing basis)

These items are pretty straight forward and relatively easy to track down.  What comes next is where many people start living in never-never land because it is more difficult to track.  We're speaking of living expenses like groceries, clothes, entertainment, lunch, parking etc.

Not only are these more difficult to track, but you really need at least 3 months experience to make them something close to a "real" number.  However, when it comes time to evaluate how the cash flow is spent, these numbers become especially important. 

Making decisions on where the money goes based on bad expense numbers is often a common practice of government.  Unlike government, you can't run a deficit budget.  Take the time to do this right.

To make the process easier in the future, settle on a standard way of buying these living expenses.  If you have a debit card from your bank and you use online banking, they typically keep six months of statements available online.  Whatever method or methods of payment you decide on, stay consistent so you can access those numbers easily.

OK.  Now you should be armed with real numbers for all your unsecured debt (credit cards and loans), recurring debt (rent, insurance car etc) and living expenses.  Now its time to load up the budget.

You can download the Google Budget Template at http://www.vertex42.com/Links/go.php?urlid=file-MonthlyBudget

This template basically has two columns next to each category, projected and actual.  Once you load in all your information, you include your take home pay and any other source of income, you'll know where you are cash flow wise.

Carefully analyze where you are spending and what you might be able to do to reduce spending.  If there is money left over, the conventional thinking would be to save it.  That probably is not the best move today.  With credit card rates potentially going up nearly 50% it is wiser to invest in debt and get the balance as low as possible before there is a rate increase.

We'll talk about this in detail in Interest Rates.  Now that you know where you are cash flow wise, let's find out what's driving your FICO score.  Let's take a look at your credit report.